Microsoft buyout rumours spice up Yahoo stock

Rumour and speculation favours Microsoft purchase of Yahoo.

By
Elizabeth Montalbano
| 19 Nov 07

Speculation that Microsoft is looking to buy Yahoo has stepped up a gear after a blogger cited a Microsoft executive who has outlined plans for the company to improve its online search market share from about 10 per cent to 30 per cent.

Former Wall Street analyst Henry Blodget, who writes for The Huffington Post, posits that Microsoft could not achieve this goal on its own, so an acquisition may be in the works. His comments come after Microsoft president of platforms and services Kevin Johnson outlined the company's online search goal at a UBS investor conference in Seattle on Thursday.

In his blog posting, Blodget said Microsoft is no closer to succeeding online than it was when it began 12 years ago, and noted that the company's online division is still losing about $1bn a year.

Microsoft still trails both Google and Yahoo for search market share and advertising revenue, and Blodget wrote that the only way company executives think they can achieve their growth goal is by making a very specific purchase. According to site analytics firm Compete, Microsoft's online search market share was 9.2 per cent in September compared to Yahoo's 19 per cent and Google's 67 per cent.

Yahoo shares closed up nearly 6 per cent Friday on renewed speculation about a possible buyout by Microsoft. Company stock opened the day trading at $25.67 and closed at $26.82.

Both Microsoft and Yahoo have said they will not comment on rumors or speculation about a deal, gossip that ran rampant in the industry earlier this year. At the height of the rumors, Microsoft purchased digital services agency aQuantive for about $6 billion in May, the largest acquisition the company has ever made.

Still, though the aQuantive deal closed in Microsoft's fiscal first quarter, which ended September, the revenue for Microsoft's Online Services Division (OSD) grew only 25 per cent year over year, and analysts criticized the company for that performance. Even Microsoft CFO Chris Liddell at the time acknowledged that this kind of growth, despite all of Microsoft's investment to grow its online strategy, was "acceptable, but not stellar."

Microsoft began to ramp up its investment in growing online advertising revenue and building out more online services in earnest in November 2005, and since then even overhauled and rebranded its search engine, Live Search. The company also has rolled out an entire portfolio of new and revamped online services under the brand Windows Live to compete in this area.

If Microsoft does indeed purchase Yahoo, Blodget wrote that it would be a far better deal for the software giant than it would be for the struggling online services company. He said that the deal "would be disastrous for Yahoo, which is having enough trouble competing with Google on its own."

"Imagine what would happen if it got swallowed by the Redmond whale," Blodget wrote. "In six months, all the remaining strong people would be gone."